Foreign Ownership Rights Relating to Land in Indonesia

Expatriate business people in Indonesia have rightful concern regarding
land use and ownership rights for business purposes. Act No. 5 of 1960
regulates the umbrella law regarding rights over land ownership. The law
covers some rights - mostly those to Indonesian citizens - namely rights
of ownership (hak milik), building rights on land (hak guna bangunan),
cultivation rights on land (hak guna usaha) and rights of use (hak pakai).

With the emergence of foreign investment and business in Indonesia,
many foreign investors need buildings or land for their company. A foreign
investor who wants to run their business in Indonesia can obtain building/office
or land under these following rights:

Building Rights on Land (Hak Guna Bangunan)

The right to build and possess a structure on land owned by others:
The duration of right for the building is maximally 30 years, extendible
for 20 years (article 30 Act No. by 5/1960). This right can be transferred
to other persons selling and inheriting, who also can secure a loan, as
a Hypothec Right.

Those who may obtain right-to-build deeds are Indonesian citizens
and legal entities (such as a PT/limited liability company) established
under Indonesian law and domiciled in Indonesia, either for 100 percent
foreign-owned, joint venture or 100 percent Indonesian-owned companies.

Foreign investors who desire to establish their business in Indonesia
can have their building/office under a "rights to build" deed for a stipulated
period.

Cultivation Right on Land (Hak Guna Usaha)

This is a right to cultivate on state land for agriculture and farming
enterprises. The duration is maximally 25 years, extendable for 35 years,
and should be registered at the Land Register at the National Land Agency
(Badan Pertanahan Nasional/BPN). As in Right to Build, Cultivation Rights
can secure a loan by delivering the certificate of Cultivation Rights to
the lender.

Indonesian citizens can own these rights, as can legal entities (such
as PT/limited liability companies) established under Indonesian law and
domiciled in Indonesia, either for 100 percent foreign-owned, joint venture
or 100 percent Indonesian-owned companies.

Right of Use (Hak Pakai)

This is the right to use and/or harvest from land directly owned by
the state (rendered by authorized official government deed), or private
land (by agreement with the owner of the land). This may be applied to
land for use as a building site or for agricultural purposes. The transfer
of this right must have local government authorization.

Right of Lease of Building (Hak Sewa)

A person or Indonesian legal entity has rights to lease another's land.
This right belongs to Indonesian citizens, foreigners, and legal entities
(such as PT/limited liability companies) established under Indonesian law
and domiciled in Indonesia or the representative office from a foreign
legal entity. The leasee and the leaser can make an agreement to arrange
it.

Hak Guna Bangunan vs. Hak Milik

Hak Guna Bangunan is only the right to use a building for a fixed period
of time, which then has to be extended. The owner of Hak Guna Bangunan
land is the Indonesian government. Meanwhile, only with Hak Milik do you
actually own the land or the building. Hak Milik does need to be extended.

By Indonesian law, a foreigner cannot own land in Indonesia but purchasing
apartments or office space is possible through a strata title deed. The
1996 regulation (No. 41/1996) states that an expatriate who resides in
Indonesia or visits the country regularly for business purposes can purchase
a house, apartment or condominium, as long as it is not a government subsidized
development. The title is only for right of use. In reality, the regulation
No. 41/1996 is still somewhat unclear and no foreigner has actually been
able to receive a strata title as a certificate of ownership. Despite this
unclear legal ownership, foreigners sign a convertible lease agreement
with property management companies or indirectly by using the names of
an Indonesian citizen whom they have a separate agreement with.

Convertible Lease Agreement

One manner for a foreigner to proceed with property purchases, despite
legal ambiguities, is to sign a Convertible Lease Agreement to purchase
an apartment. Under the forgoing agreement, the foreigner may purchase
the apartment, but the title is still held in the name of the developer
or property management firm. This lease agreement is for a definite period.

The Convertible Lease Agreement states that, if and when the prevailing
laws and regulations permit, the lessee becomes the legal owner of the
apartment/strata title unit. Both the lesser and the lessee will be obligated
to sign a deed of sale and purchase and the title will be transferred to
the foreign owner.

If you are interested in purchasing a condominium through this type
of agreement, investigate the property management company thoroughly. In
the current economic downturn, many developers are bearing serious economic
pressures and construction costs on many properties that have been delayed
or canceled. Consult with a reputable lawyer to ensure that all legal implications
are thoroughly covered.

Indirect Ownership

Another way to purchase a condo is in the name of an Indonesian citizen.
But the person must be someone you really trust. The person would be the
legal owner of the property according to the law.

Suggestion

It is strongly suggested that before making any property purchases or
signing any property agreements, foreigners should consult bona fide lawyers
that are experts in Indonesian property ownership to understand the legal
status of the ownership and prevent any regrets in the future.